Defence giant BAE Systems aims to become a world leader in the hugely competitive military systems market after unveiling a #2.09 billion deal to buy US rival United Defense Industries.

BAE plans to finance the deal through existing resources, a new $3 billion US (#1.56 billion) debt facility and by placing shares worth around #375 million.

The move will help BAE - which last year merged Midlands tank manufacturer Alvis and its RO Defence business to form Land Systems - capitalise on the increase in spending by the Pentagon as it combats the growing threat of terrorism and maintains operations in Iraq and Afghanistan.

United Defense generated sales of #1.19 billion last year.

It designs and develops combat vehicles, artillery systems, naval guns, missile launchers and precision munitions used by the Pentagon and its allies.

In addition, the group repairs and converts ships for the US Navy and other US government agencies.

BAE yesterday said the deal for United Defense would give it a leading international position in the land systems sector, which is growing rapidly as the US military takes on more roles around the world.

The business will be integrated with BAE's existing operations in North America, which currently employ more than 27,000 people in the US and generate more than $5 billion (#2.6 billion) in sales annually.

BAE said North America would now account for a third of its profits - against a quarter previously - and the US Department of Defense would become its biggest customer to replace the Ministry of Defence in the UK.

BAE chief executive Mike Turner told shareholders: "We are accessing one of the fastest-growing areas of the US defence budget where the priority is being given to the army."

The deal is expected to be completed by the middle of this year and no issues are anticipated with US regulators or with the public support of leading European politicians to the lifting of the arms embargo on China.

Mr Turner added that BAE saw off competition from a number of other potential buyers to land UDI and the deal will deliver an immediate boost to earnings.

It is in line with the company's strategy of expanding its presence in the US defence market. BAE has been targeting growth in its land systems business and acquired UK tank maker Alvis for #355 million last June.

Alvis employs a 2,600-strong workforce in the UK and Sweden and has major sites in Wolverhampton, Telford, Newcastle and Leeds.

Among opportunities for the development of the United Defense business was the repair and upgrade of 7,000 Bradley combat vehicles. Around #677 million has been allocated this year by US authorities for this work.

The enlarged land systems business will also hold a major position in the Future Combat Systems programme, which is the US Army's largest procurement plan.

Analysts said the deal made good strategic sense, though was perhaps a little expensive.

"Apart from the valuation, which looks slightly on the high side, everything else stacks up," said SG analyst Zafar Khan.